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July 31, 2010

GM and GDH

We're at the first anniversary of the GM/Chrysler "bailout", where Uncle Sam bought out the creditors and became the second largest shareholder behind the UAW's retiree health fund. President Obama was in the Detroit area yesterday bragging on how what the talkers like to call "Government Motors" is doing post-bankruptcy.

As much as Republicans would like to have some extra ammo, that decision seems to be working out. GM is rebounding nicely and is looking to be in position to do an IPO of GM 2.0 and let the stock market take the stock off the hands of the UAW and Uncle Sam and let them go back to building cars and normal regulating respectively. Like the original Chrysler bailout in the Carter era, this one looks to prove to be a good investment.

Told by a reporter that “You had Rush Limbaugh today — today or
yesterday — talking Obama Motors again,” Gibbs, who doesn’t often
provide free advertising by taking on his critics by name from the
podium, let fire.

“Look, Rush Limbaugh and others wanted to walk away. Rush Limbaugh
and others saw a million people that worked at these factories, that
worked at these parts suppliers, that had — that supported communities,
and thought we should all just walk away. The president didn’t think
that walking away from a million jobs in these communities made a lot
of economic sense,” Gibbs said.

That is a bit of an overstatement by Gibbs. Had GM and Chrysler gone through a conventional bankruptcy proceeding, most of their operations, and the operations of their suppliers, would have kept going, as the credits would have been interested in keeping a live GM and Chrysler in a Chapter 11 rather than selling the factories and car inventories at fire-sale prices in a Chapter 8 liquidation. Some of the underperforming plants and suppliers might have bit the big one in a Ch11 restructuring, but not all million jobs as Gibbs would have us believe.

That being said, such a large bankruptcy would have been messy, and Uncle Sam would have wound up picking up a big chunk of the UAW's retirement health care tab via pension-guarantee funds. The negotiations between the UAW and the bankruptcy judge on wage and benefits cuts to make GM 2.0 viable would have had the potential to be rather ugly. Creditors would be in court looking for a better deal and appeals could have taken years, with the Supreme Court likely getting involved in some of the more contentious issues. Owners of cars would have their warranties go up in smoke in return for some stock in the restructured company or a cents-on-the-dollar settlement.

Would that brawl of a Ch11 filing been better than the Government Motors version of Uncle Sam forcing a deal on the creditors and buying them out at about 20 cents on the dollar? From a free-market standpoint, it was an awkward precedent of having government step in and take over one of the country's largest employers. However, the chaos that it saved seemed to be beneficial to the country as a whole. Using the Gross Domestic Happiness meme, this was a plus to GDH and, in 20/20 hindsight, GDP as well.

Hayek and Friedman might be spinning at 5000RPM in their graves, but the Obama's team move worked. However, that move was in the middle of a less-than-effective TARP package for financial institutions and a massive "stimulus package" that has underperformed its expectations. Government was increasing its hold on the economy at a pace not seen since at least the LBJ era, and the GM package got lumped into the Obama excesses.

A McCain administration might have done something similar had they had the reins last year and would have had a harder time getting the UAW onside to a plan. The economic libertarians would have screamed at about 75% present voice over it, but it would have been the GDH thing to do.